Legal Updates

Court of Appeal considers Duomatic principle

A recent Court of Appeal case has clarified the law around the Duomatic principle, finding that the principle cannot be used where a shareholder is dissolved or deceased but is still on the register of members. Corporate lawyer Henry Evans explains.

The Duomatic principle

The Duomatic principle is a common law principle under which, in certain circumstances, informal unanimous agreement by the shareholders of a company will bind the company in the same way as if a resolution had been passed formally at a general meeting. This principle has not been codified, but has been preserved by section 281(4) of the Companies Act 2006. The Duomatic principle can be useful for companies in that it may allow them to retrospectively approve actions which were made in breach of the procedures set out in the company’s articles

For the principle to apply, (i) there must be unanimous consent of all shareholders with the right to vote at a general meeting of the company and (ii) those shareholders must have full knowledge of the matter to which they are assenting (Re Duomatic Ltd [1969] Ch 265).

In Re Duomatic Buckley J said: ‘where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company would carry into effect, that assent is as binding as a resolution in general meeting would be’.

Court of Appeal case

In Randhawa and another v Turpin and another [2017], the Court of Appeal confirmed that the Duomatic principle could not be applied to approve the appointment of administrators by one director alone (who was also a 75% shareholder) of a company (Company), where the Company’s articles stated the need for a quorum of two directors at board meetings. The remaining 25% of shares were registered in the name of an Isle of Man company which had been dissolved in 1996 (Dissolved Shareholder) but which, despite this, had remained on the Company’s register of members.

The Court of Appeal held (unanimously) that the Company could not be regarded as having only a single member: ‘the meaning of “member” in any given context is primarily a matter of construction of the statute and the company’s constitution’. The Court held that this included ‘any member registered on the companies register, whether alive or dead, and, if corporate, whether subsisting, in an insolvency procedure or dissolved’.

The holding of the Dissolved Shareholder could therefore not be ignored, even given the impossibility of obtaining its consent, and as such the Duomatic principle could not be applied, so the appointment of the administrators was found to have been invalid.

Comment

This case is useful insofar as it demonstrates that the Duomatic principle has defined limits and that in some cases it will be impossible for Duomatic to be applied, even if all living/subsisting shareholders agree on a matter, though the Court’s judgment is clearly unhelpful for practitioners in that it will be harder to use the Duomatic principle to approve actions in respect of which the correct procedures were not used. The principle could not apply in this case, and it is incapable of being applied in any situation where one of the registered shareholders of a company is itself a company which no longer exists, because in order for the principle to apply the consent of all of the registered members is needed, and a company which has been dissolved will not be capable of consenting but will still be counted as a member for these purposes. The judgment makes sense on the basis that just because a shareholder has died (if an individual) or ceased to exist (if a company), that does not mean that the shares have ceased to exist. If held by an individual, they may have passed to somebody else, under a will for example, or to the Crown under the Bona Vacantia rules if the shares were owned by a company which ceased to exist without disposing of the shares first. The new owners of the shares, whoever they are, would have a right to attend and vote at a general meeting, and if they were not a party to a relevant decision then the decision cannot have been unanimous for the purposes of Duomatic. The judgment further highlights the importance of keeping a company’s register of members up to date, and of reflecting any change in the status of a company to a single member company if this becomes relevant.